The scheme 

Just as we deposit money in our savings account with the bank and get interest, similarly as per this scheme we can deposit gold with the bank (in our metal accounts) and get interest for the same. 

Households at large are expected to be the depositors and the jeweler (see Note below) community is the prospective borrower who can get gold as loan in their metal accounts. 

According to the scheme, people who are interested in depositing gold under this scheme can get their gold tested for purity in any of the 350 hallmarking centres (see Note below) across the nation. Here the depositor will get to know the approximate value/purity of the gold. If they still wish to proceed, the centre would then melt the gold in their presence. After the gold is melted, the depositor can chose to either pay the melting fee and keep the gold or deposit the gold with a bank, in which case the fee will be borne by the bank. 

The deposit has to be made for at least one year and the interest will be paid in cash or gold units (as per the choice of the depositor) after every 30 or 60 days. At the time of redemption, the depositor can withdraw either cash or gold units.   

Objectives of the scheme

1.    Reduce dependence on imported gold
India is one of the largest consumers of gold with annual demand of 800-1000 tonnes and approximately 97% of that demand is met through imports. Thus, gold imports are a huge drain on forex reserves, leading to higher current account deficit.This scheme intends to put a check on these imports and thus strengthen India's economic position. As per some experts, the scheme can reduce imports by as much as USD 10 billion

2.    Convert savings into investment and thus foster economic growth
The huge reserves of gold with Indian households represent enormous wealth, but these hoards do not contribute to growth. This proposal is an attempt to scoop out the estimated idle reserves of 20,000 tonnes of gold from the lockers, which will lead to investment of about 5.5 lakh crores into the economy.

3.    Give the much-needed push to the Indian gems and jewellery sector
Small jewellers have to rely on the big jewellers/gold importers for their raw material, which leads to concentration of supply in a few hands. The easy availability of gold in a jeweller' smetal account from a legal authority (bank) will ensure proper quality at competitive prices in the country.

Proposed Goodies 

1.    The interest earned from this scheme will be exempt from income tax, wealth tax and capital gains tax.

2.    To garner banks' interest, the scheme is proposed to include the deposits under the cash reserve ratio requirements. Banks can also sell the deposits to generate foreign exchange, convert it into coins, use it on commodity exchanges and lend tojewellers. 

3.    The minimum deposit is a meagre 30 gm, which makes the scheme attractive for a broader section of the society. 

Moment of truth 

1.    The biggest challenge is the emotional and ornamental value attached to gold. For Indians it is not just a precious metal or any form of investment, it is the jewellery that is worn to adorn the beauty and gifted to the daughters in marriage (and even before marriage) that makes it emotionally valuable. The thought of parting with their jewellery may not go down well with most Indian women.

2.    A major portion of the jewellery bought in our country is not declared, then how can we expect people to deposit their gold in a government scheme? Will they risk the principal and a lot more just for the sake of earning interest?  Hence, we must not expect a very huge response from the households in particular.

Nonetheless, the scheme will be of great interest to all the major temples receiving insane amounts of gold as offerings tovarious deities. . They can surely take advantage of this scheme as they have nothing to fear the government and have no attachment to the ornaments.

People who have invested in gold ETFs are also likely to show some interest in the scheme. As their investment can now earn them an extra interest, apart from the capital appreciation sans the risk of custody. However, the procedural formalities will have to be sorted out.

The scheme is ambitious and very much needed. Attempts have been made to keep something for all which is appreciable. Whether or not this scheme actually clicks will largely dependon how the households react to it.